The International Monetary Fund (IMF) delegation's recent visit to Lebanon has added to the possibility of Lebanon being downgraded by the Financial Action Task Force (FATF) to the gray or even black list on the scheduled date in May 2023, as stated. The IMF's evaluation is considered a crucial criterion foreign entities adopt when reviewing their classifications.
The IMF's report highlighted that "Lebanon is in a critical situation and failing to take the necessary actions will lead the country into an endless crisis," which is not reassuring for the international community. The report also emphasized the need for the government, parliament, and the central bank to take decisive measures to address the long-term institutional and structural weaknesses, which also does not contribute to maintaining Lebanon's current classification.
This article is originally published in, translated from Lebanese newspaper Nidaa al-Watan.
The IMF also predicted that "the informal economy will increase, and the risk of illicit activities becoming entrenched in the economy will rise," indicating expectations for money laundering operations to become more frequent, especially given the IMF's warning of the acceleration of the high risk already existing in currency.
These data presented by the IMF fall within the factors adopted by the FATF, as the group issues its classifications based on the countries' commitment to anti-money laundering and counter-terrorism financing laws. Lebanon was previously categorized in the gray list in the late 1990s. Then, it underwent a legislative workshop to pass compliance laws to combat money laundering and terrorism financing, eventually removing Lebanon from this list.
Financial and monetary sources indicated credible reports which confirmed the spread of money laundering operations in Lebanon, with large cash deals being made without identifying the sources of those funds, in addition to drug dealing money (especially Captagon). There are also questions from international parties about Hezbollah's al Qard al Hasan association, which operates outside any official oversight. The sources of the funds it lends to its clients are unknown.
Today, with the economy turning into a cash economy by an estimated percentage of 60-80%, with banks losing their essential functions, including the ability to track the movement of funds in the country, and with the illegal economy growing more significant than the official economy, and with the spread of chaos in transferring money outside the banking system, compliance with anti-money laundering and counter-terrorism financing laws has become almost impossible.
Consequently, the motivation to lower Lebanon's classification to the gray list is almost certain, and even the possibility of downgrading it to the black list has also become likely.
The gray list includes countries subject to increased monitoring and those that work with the FATF to address deficiencies in their anti-money laundering and counter-terrorism financing systems. These countries committed to following the specific action plan to address their deficiencies.
As for the black list, it includes high-risk countries such as Iran and North Korea. These countries have strategic deficiencies in their anti-money laundering, counter-terrorism financing systems, and arms proliferation, and the FATF calls on all member countries to take countermeasures against them.
According to Samir Hammoud, former Banque du Liban (BDL) governor, Lebanon may face a downgrade to the grey list of countries not cooperating with international anti-money laundering and counter-terrorism financing standards.
Hammoud mentioned to "Nidaa Al Watan" that the shift from banking to cash transactions, combined with increased money laundering operations, will negatively impact financial transactions relied upon for imports and ex-pat remittances. The repercussions of this matter affect the bank remittances on which the import process depends most ($19 billion annually) in addition to diaspora remittances ($7 billion), "therefore, the relationship of Lebanese banks with correspondent banks will worsen after classifying Lebanon in the list of non-cooperating countries and of dubious sources used in the banking sector."
He also added that Lebanese banks might face difficulties in their relationships with correspondent banks, and remittances may be subject to stricter scrutiny, leading to delays and potential rejections.
Hammoud highlighted that remittance requirements would become more stringent and limited to documented commercial and familial relationships. Some remittances could be rejected, leading to deteriorating relationships with correspondent banks that may decide to stop dealings with Lebanese banks to mitigate their risks.
Moreover, Lebanese banks can bear the cost of complying with the strict standards and additional conditions required for being classified in the grey list, which will challenge smaller banks that may be unable to continue operating and be forced to exit the market.
If Lebanon were blacklisted, which is excluded by Hammoud, it would prompt correspondent banks to request the closure of Lebanese banks' accounts, "but Lebanon will not reach this stage even if the pressure increases.
However, economic expert Dr. Nassib Ghobril noted that the International Working Group issued an updated grey list on February 23, 2023, it added Nigeria and South Africa to the list, but Lebanon was not nor mentioned in the statement so, "therefore, there is no need for speculation and intimidation that the Group will add Lebanon to the grey list before anything official is issued."
He also explained to "Nidaa Al Watan" that the International Working Group periodically reviews countries' compliance with international anti-money laundering and counter-terrorism financing standards. Countries classified in the grey list are required to undertake a series of measures within a specified time frame in collaboration with relevant authorities. Compliance departments in correspondent banks will decide whether or not to continue dealings with banks from countries on the grey list.